At the start of the year, I believed that shares of Inspire Medical Systems (NYSE:INSP) were starting to offer a good night of sleep to investors.
The company has seen meaningful growth during the year, and not only has the company hiked the full year sales guidance, it became profitable as well, while the FDA approved a new device. Amidst a stagnant share price, appeal is rapidly improving even as current earnings multiples are demanding.
Amidst all this, I am gradually buying into Inspire Medical Systems shares here, impressed with the performance and looking for a re-rating over time.
A Sleeping Giant?
Inspire Medical Systems focuses on the development and commercialization of minimally invasive solutions for patients suffering from sleep apnea. To this end, the company has developed the Inspire system, a so-called neurostimulation technology used to treat obstructive sleep apnea.
The system essentially monitors breathing patterns, and if and when necessary, it delivers a nerve stimulation through implanted devices to open airways when breaking patterns being irregular. The operation itself is pretty reasonable, to thereby equip patients with a decade-long lasting battery.
Just a $25 stock back on the IPO day in 2018, Inspire commanded a $400 million market value. This was based on the FDA approved product, at the time generating about $40 million in sales (having more than doubled from a $17 million revenue number in 2017).
Since the public offering the company has seen solid growth as revenues broke the $100 million mark in the pandemic year 2020, with sales doubling to $233 million in 2021, only to nearly double again to $408 million in 2022.
Despite the impressive top-line sales growth and gross margins in the 80s, the company continued to post operating losses (even as they improved on a relative basis). For the year 2022, the company posted an operating loss of $48 million, for low double-digit negative margins.
The market pushed up the shares to the low $300s in 2023, granting the company a $9 billion valuation, resulting in sky-high revenue multiples of over 20 times.
Picking Up The Valuation
Momentum in 2023 was driven by a solid outlook, as the company originally guided for full-year sales to grow by 37-40% to $560-$570 million. While the company had upped the full year sales guidance to $610 million by the fall, shares were down to a low of $120 at the time, amidst a sell-off in many previous momentum names.
What followed was a big recovery to the $220 mark in February, marking impressive returns in a rather short period of time. This was driven by interest rates moving lower and the company posting 2023 sales at $625 million, as the company actually posted an operating profit of $9.3 million for the fourth quarter!
A guidance calling for 24-26% revenue growth in 2024, with sales seen at a midpoint of $780 million, looked conservative as no guidance on margins was given. With growing cash balances, there is no immediate need for profits, but nonetheless this was a bit disappointing. Management furthermore indicated that strength was seen during the year, notably the second half.
Trading at 7-8 times forward sales, I was performing a balancing act, as the company clearly disregarded a negative impact of GLP-1 drugs. Given this, I was constructive, yet only willing to buy shares on a pullback, or period of stagnation.
2024 — A Mixed Year
In May, shares plunged overnight from $250 to $170 upon the release of the first quarter results. The company posted a solid 28% increase in first quarter sales to $164 million, as operating losses of $15 million improved modestly from the same quarter last year. The company increased the midpoint of the full year sales guidance to $788 million, but moreover expected to be profitable, but nonetheless shares sold off significantly.
By the end of July, shares had recovered to the $150 mark as the company posted preliminary second quarter sales up 30% to $196 million, still for about 95% realized in the US.
Shares rallied to the $180s as the good news show continued. Early in August, the company announced that it obtained FDA approval from the Inspire V System. The company calls this the next generation neurostimulator with associated patient remote and physician programmer. The soft launch for this program is expected later this year, with full launch seen in 2025.
Days thereafter, the company confirmed the 30% increase in second quarter sales to $196 million, but moreover the company posted an operating profit of $5 million. The company hiked the full-year sales guidance by another $5 million to a midpoint of $793 million, while raising the full-year earnings guidance to $0.60-$0.80 per share, which is about $20 million in dollar terms. This comes after break-even results have been posted so far this year.
And Now?
The reality is that Inspire Medical Systems, Inc. has a great year so far from an operational perspective, as shares have been lagging (even after the recent rally). Trading at $180, the company commands a $5.4 billion equity valuation. This number includes a $465 million net cash position, for a less than $5 billion operating asset valuation, at around 6 times sales.
Note that these cash holdings are set to come down a bit, as the company announced a $150 million share buyback program, sufficient to buy back about 3% of the shares here.
The truth is that the developments look pretty comfortable. Trading around 6 times sales, the company posts sales growth rates near 30% which is impressive given the size of the business. Moreover, profitability is really achieved here. While this year’s earnings are limited at $0.70 per share, these are expected to be solely realized in the second half of the year.
This shows that with continued topline growth and margins gains, earnings growth might be outright impressive or here, also creating an interesting backdrop for potential M&A interest. This is also the case as the business is until 95% US based, leaving huge overseas growth opportunities, as the launch of the Inspire V will likely drive growth further into 2025 as well.
Amidst all this, the risk-reward is improving rapidly here. While this is not a traditional value play, I like the relative value play and risk-reward proposition. This means that I am happy to start buying into Inspire Medical Systems, Inc. shares at current levels, anticipating further dips here, with a full intent of averaging down.
